Two Cheers for OCO: Grease For Budget Wheels

The verdict from think tanks and commentators is in: Overseas Contingency Operations (OCO), the much-criticized war funding account, should move to the base budget because of abuses and a lack of transparency. As a matter of theory, such a move would be good government. OCO deflects hard choices and distorts the budget process. In the real world, however, such a move is unlikely. OCO provides the grease that makes budget agreements possible, and the political costs of closing it are too high for any White House.

To be sure, OCO has a long and tangled history.  It began small, covering the incremental costs of the wars in, first, Afghanistan and then Iraq.  It grew rapidly (from $29 billion in FY 2001 to a high of $187 billion in FY 2008) as the wars expanded, the secondary and tertiary costs of the wars became apparent, and DoD moved tangentially related costs into the account, realizing that the Congress would likely accept them.  The Obama administration made some changes when it took office, changing the name, submitting the request with the regular budget, and publishing criteria for what should, and should not, be in the account. The amount has come down over time but in FY 2016 it is still $59 billion.  (For a quick backgrounder on war funding, see the CSIS OCO video here.)

The Budget Control Act of 2011 (BCA) fundamentally changed OCO’s role.  The Act cut DoD’s budget by $487 billion over 10 years, but OCO was not restricted by the BCA caps.  OCO thus become a “safety valve” for funding activities that could not fit in the reduced base budget. (For a backgrounder on DoD and the BCA, see another CSIS video here)

As a result its use generated much controversy.  A recent Stimson Center report, like many others, criticized OCO for undermining budget controls and generating long-term budget uncertainty that inhibits planning, recommending that most funds be moved to the base budget.

The issue came to a head recently over “enduring” costs, that is, costs of activities that will continue after all troops leave Iraq and Afghanistan. My colleague, Todd Harrison, was probably the first to point out that up to $30 billion in OCO was not related to the troop levels in combat. Deputy Defense Secretary Bob Work recently acknowledged this, putting the number for “enduring activities” at $33 billion. Although the existence of enduring requirements had been long known, the high amount was a surprise and generated questions about the fund’s appropriateness. Criticisms have been sharp: it was a “charade”, according to the Project on Government Oversight. Senator McCain and Congressman Thornberry have piled on. The Government Accountability Office is beginning an investigation.

The $33 billion number is not quite as shocking as some have implied. Although the Pentagon has not released any details, the amount likely includes costs for basing forces in the theater –Kuwait, Qatar and Bahrain — support to Afghanistan forces, and readiness of forces deployed to theater. Although enduring, these activities actually meet the Obama administration’s published criteria. In addition, there are costs for European reassurance, global counter-terrorism operations, and the 2015 Bipartisan Budget Agreement that do not meet the criteria but that the Congress and President have explicitly agreed to put into OCO. The costs are legitimate but they could be folded into the base budget.

The problem is that OCO has been valuable to both the Congress and the executive branch for reasons both parochial and strategic. As a result, despite the protestations, they will be reluctant to give up that flexibility.

The most obvious flexibility is OCO’s usefulness in making budget deals. With the BCA in place, government shutdowns have loomed and Continuing Resolutions have blossomed because deficit hawks in the Tea Party wing of the Republicans, security hawks in both parties, and advocates of domestic spending among the Democrats could not agree on a budget. OCO gave everyone a way out. The latest agreement, in 2015, added OCO for both defense and domestic (for DOD, $7.7 billion in FY 2016 and $5.2 billion in FY 2017).  The “one-time” OCO adds allowed everyone to claim victory. Ugly, yes, but it worked. The need for this kind of flexibility ended the administration’s short-lived 2015 attempt to move activities from OCO to the base.

The OCO’s “flexibility” allowed DoD to accept the BCA  legislation and not urge a presidential veto. For four years (FY 2011-2014) the Office of Management and Budget (OMB) allowed DoD to put some manpower costs in OCO, on the argument that these additional personnel were war-related. In effect, this moved costs from the restricted base budget to the unrestricted OCO budget and took some of the sting out of the BCA reductions.

OCO allowed the US to respond rapidly to Russian aggression. In March 2014 Russia moved forces into the Crimea; by June the administration had a program (called the European Reassurance Initiative) and proposed resources to respond.  Having the resources added to OCO avoided a contentious and protracted fight over offsets and priorities.

And, this being Washington, OCO allowed parochial interests to fund programs that might not otherwise make the cut. Every year, for example, OCO funds about $1 billion of National Guard and reserve equipment, as well as non-combat aircraft losses

Moving OCO into the base would not be easy politically. It looks like a simple accounting transaction: cut OCO by the amount of the enduring activities, say $33 billion, and add $33 billion to the base budget. There is no net change to spending or authorities, just more discipline and accountability, right? Well, there are very practical problems. First, the White House will not want to give up the flexibility that OCO provides. Politicians are happy to restrict someone else’s flexibility, but not their own. Second, the Pentagon and defense hawks will demand that every dollar moved out of OCO be put into the base without reductions. That will lock in current activities, which some will object to.

More importantly, Democrats in Congress will balk. Obama and the Democrats in Congress have been adamant that any increase in defense spending must be matched, dollar-for-dollar, by an increase in domestic spending. Liberal commentators will argue that the move from OCO-to-base constitutes an increase to the defense budget, because it is permanent. Many Democrats will therefore demand a similar increase in the domestic budget. That may not be reasonable from an accounting perspective, but it will be the perception. The White House could overcome the opposition, but that takes political capital it would prefer to spend elsewhere.

So what should we do?  The ideal solution would be to move OCO into the base as part of a “grand bargain”, an agreement that puts the federal budget on a sustainable long-term path and includes revenue, domestic spending, and entitlements. Virtually every budget commentator agrees that the nation needs such an agreement (for example, Alice Rivlin, Bob Hale and Maya MacGuineas at a recent Brookings Institution event). Unfortunately, the Joint Select Committee, created by the Budget Control Act to devise a grand bargain, failed spectacularly, thus allowing the specter of sequestration to haunt the budget landscape. The Obama administration made no progress, sticking instead to its own budget preferences. One hopes that a new administration would make budget sustainability a priority but neither candidate has done so. In fact, both Clinton and Trump would make the problem worse through massive budget increases or tax cuts.

Halfway measures are possible.  The new administration could revise the criteria to make them tighter. The 2010 criteria for what can be placed in the OCO budget (full disclosure—I wrote them while at OMB) were written when the incremental costs of conflicts were high and “enduring” costs of a long-term global conflict were not envisioned. As an additional step, the criteria could be enacted into law, as some have proposed.   This White House, the next one and the Congress could still contravene those criteria, but it would be harder.

In the end, OCO will continue. It is an imperfect mechanism for a fractured government to govern a divided people. But it works.